TMFDeej (99.04)

Extremely bullish on natural gas

12

Despite the astronomical rise in the price of natural gas over the past year, I continue to be very bullish. Normally once winter is over, the demand for natural gas tapers off and we see a significant drop in its price. The fact that there are many E&P companies partially hedged at sub-seven dollar natural gas this quarter and next illustrates just how sudden and rapid the its price has been. I strongly believe that nat gas has a lot more room left to run. Natural gas is currently trading a 40% discount to oil, on an energy equivalent basis. Furthermore, it is trading at much higher prices in Europe. These higher European prices are causing LNG (liquefied natural gas) to be diverted away from the United States, causing additional upward pressure on prices here.

Natural gas has a lot of wind at its back in the form of increased usage for electricity generation, usage by ethanol plants, usage in the recovery of oil from Canada's oil sands, and the peak of the hurricane season rapidly approaching. I personally would not be surprised to see $15+ natural gas before the end of the year. This doesn’t even get into the potential passing of a carbon tax or cap and trade regulations by a soon to be all Democratic U.S. government down the road (nat gas has lower carbon emissions than coal).

Today the energy ministers from Qatar, Algeria and Iran issued similar bullish statements about nat gas. Iran's oil minister Gholamhossein Nozari stated "There is a natural relation between the price of oil and the price of gas. Because it is a clean fuel it will increase its role in the energy market and I think the price of gas will increase as well.'' (see article: Natural Gas to Converge With Oil Price, Exporters Say).

In the U.K natural gas is currently selling for 71.35 pence a therm, which is the equivalent of $85 oil. This compares with $141 Brent crude. British natural gas has risen only 38% this year, compared to the 50%+ rise in the price of oil.

Not only has the price of natural gas lagged the price of oil, but demand for it is rising faster than demand for oil. According to statistics published by BP, global natural gas usage increased 3.1% in 2007, compared with an increase of only 1.1% for global oil usage.

I am long a number of E&P companies with significant natural gas exposure, including Apache (APA), XTO, Devon (DVN), and Penn West (PWE) to name a few. The market is not giving these companies nearly enough credit for the expensive natural gas that we are currently experiencing and will likely continue to see in the foreseeable future.

Nat gas will always trade at a discount to oil for a variety of reasons. I'm still more bullish on oil than I am on gas. I like PWE and ATN for oil and gas plays - even though I believe the fundamentals are there for 200/bbl oil right now, my spidey sense always tingles when things start to go parabolic. I'm much more comfortable when prices are nearer 52 week lows. Of course I highly doubt we'll see oil in the 70/bbl price range again, but even though the fundies are there for more rising energy prices, I still would like to see some downward movement of oil and gas prices before I started or added to a long-term position in any company. That's why I'd prefer PWE and ATN - the dividend yields are so high you can recoup losses fairly easily if prices do drop.

A suggestion for ya Deej: how about a writeup of the canadian oil sands companies? I posted a blog about them here: A GOOD Investment for a change: Canadian Oil. The short version: "Canadian oil. You pretty much can't go wrong with it, try to catch it on a dip and you'll make some good cheese." Suncor is getting closer to a buy (55/share is where I'd consider a position), and I love the canadian oil companies. Been thinking about taking a flyer on BQI for a while now.

Thanks for the comments, Doug. I expect the price of oil to stay high as well, I just think that it has gotten a little ahead of itself and that nat gas has more room to run in the short-term. Having said this, I don't see anything that is going to derail the oil train over the next several weeks. Unless the government manipulates the data, I expect the jobs picture to be a mess today and I expect the ECB to raise interest rates. Both of these things are bad news for the dollar. The lower the dollar goes, the higher oil goes.

I'll head on over to your blog on oil sands later today. I would have checked it out sooner, but work has been absolutely nuts this week.